Kuaishou Stock: Q2 Earnings Good, Uncertain Outlook (KUASF)

Elevator Pitch

I keep my Hold investment rating for Kuaishou Technology’s (OTCPK:KUASF) (OTCPK:KSHTY) [1024:HK] stock.

I reviewed Kuaishou’s Q1 2022 financial performance in an earlier June 1, 2022 article for the stock. I share my thoughts on Kuaishou in this recent update following the company’s recent Q2 2022 earnings announcement.

Investors didn’t view Kuaishou’s recent results in a favorable light, as the company’s share pulled back significantly on the day after its Q2 2022 results disclosure. Kuaishou’s top line growth was ahead of expectations and its losses were narrower than what sell-side analysts feared. Nevertheless, investors continued to have concerns about the revenue outlook for the online marketing services business and the company’s ability to control costs and investments in the future. As such, the sell-down in Kuaishou’s shares post-earnings release isn’t completely unjustified. In view of both the stock’s recent results and future prospects, I chose to maintain a Hold rating for Kuaishou.

Narrower Than Expected Losses For Kuaishou In Q2 2022

Kuaishou released its financial results for the second quarter of this year on August 23, 2022.

Revenue for Kuaishou expanded by +13% YoY from RMB19,139 million in the second quarter of 2021 to RMB21,695 million in the most recent quarter. The company’s top line came in +5% higher than what the sell-side analysts covering Kuaishou’s shares had expected, as per the consensus financial estimates obtained from S&P Capital IQ.

The main driver of Kuaishou’s second-quarter top line beat was a +19% YoY growth in the revenue contributed by its live streaming business segment from RMB7,193 million in Q2 2021 to RMB8,565 million in Q2 2022. On a QoQ basis, Kuaishou’s live streaming revenue also increased by +9% in the recent quarter.

In my prior June 1, 2022 update for the company, I had cautioned that “increased regulatory scrutiny for the livestreaming business in China will place a cap on Kuaishou’s future growth in this particular segment.” But Kuaishou’s live streaming business performed above expectations in Q2 2022 despite regulatory pressures. The company explained at its Q2 2022 investor call on August 23, 2022 that the live streaming business managed to achieve a +22% YoY growth in monthly paying users thanks to “improvements in overall content quality as well as operational capabilities for our live streaming business.”

Also, adjusted net loss for Kuaishou was narrower in the recent quarter, going from -RMB5,016 million in Q2 2021 to -RMB1,312 million for Q2 2022. It is worthy of note that the sell-side analysts were expecting a much wider Q2 2022 net loss amounting to -RMB2.9 billion. On top of better cost management, Kuaishou also revealed at its recent quarterly earnings briefing that “revenue-sharing costs and also related taxes as a percentage of revenue” contracted by -250 basis points QoQ in Q2 2022. This explains why Kuaishou was able to register smaller-than-expected losses for the recent quarter.

Post-Results Price Performance Wasn’t Aligned With Better-Than-Expected Financials

In my previous initiation article for Kuaishou written on April 16, 2021, I had mentioned that the company’s “shares are listed on both the OTC market and the Hong Kong Stock Exchange” with much higher trading liquidity for the latter. Based on S&P Capital IQ’s market data, Kuaishou’s Hong Kong-listed shares with the ticker 1024:HK had an average three-monthly daily trading value well in excess of $200 million. As such, it is relevant to track the stock price performance of Kuaishou’s Hong Kong-listed shares as a gauge of how investors are viewing the company’s recent set of quarterly results.

The stock price of Kuaishou’s Hong Kong-listed shares surprisingly fell by -8% from HK$75.10 as of August 23, 2022 to HK$69.00 as of August 24, 2022, even though the company reported better-than-expected revenue and bottom line for the second quarter of this year. Furthermore, Kuaishou’s share price has pulled back by approximately by -25% in the past six months.

In the next section, I highlight some of the investor concerns relating to Kuaishou, which might have resulted in the underperformance of the company’s share in spite of above-expectations results.

Key Investor Concerns For Kuaishou

There are two key concerns that investors have with regards to Kuaishou, and these could be the reasons for the stock’s weak post-results price performance.

The first key concern lies with the short-term revenue outlook for Kuaishou’s online marketing services business.

I noted in my previous article for Kuaishou published at the beginning of June 2022 that “the weak advertising market in China will be a drag on the performance of its online marketing services business.” My fears were confirmed to some extent with revenue generated from the online marketing services segment contracting by -3% QoQ to RMB11,006 million in Q2 2022. Kuaishou also mentioned at its Q2 2022 earnings briefing that the company is operating in “a weak economic environment” with “advertisers” becoming more “conservative” in terms of their budgets.

The second concern relates to future investments and expenses.

Cost management clearly played a key role in Kuaishou beating market expectations in terms of actual expenses for Q2 2022, which resulted in a better-than-expected bottom line for the company in the recent quarter.

Kuaishou discussed about “overseas growth” and highlighted that “we’ll further increase our investment algorithms and products” at its second-quarter earnings call. This could imply that there might be an increase in Kuaishou’s costs and investments in Q3 2022 and beyond, so the “cost beat” for Q2 2022 might not be sustainable.

Closing Thoughts

Kuaishou is a Hold-rated stock in my view. The company’s above-expectations top line and bottom line for the second quarter of the current year were encouraging. However, investors clearly don’t believe that the company’s good performance for Q2 2022 can be sustained as evidenced by its -8% stock price drop after releasing recent quarterly results. I think that there are good reasons why investors are concerned about Kuaishou’s future results. The online marketing services business saw its segment revenue decline in Q2 2022, and there is a possibility of a ramp-up in investments in subsequent quarters. As such, I continue to have a Neutral view of Kuaishou’s stock implying a Hold rating.